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Public policy: minerals and energy: sixty years on.

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Public Policy -Minerals and Energy


Sixty Years On


Charles Copeman A.M.





Thank you for asking me back 19 years later.  I will  talk first of all about some

experiences of the interaction between public policy and the mineral and energy industries.  I

will then draw together what I consider should be public policy if our industry is to make its best effort for its future prosperity and for our country's economy.  You may find part of my talk rather political.  I make no apology.


Sixty Years On.  Certainly 57 years ago I stood in the convertor aisle at Mount Isa only weeks after the first copper metal had been blown, and Julius Kruttschnitt himself presented me with a piece of blister copper.  Public policy had persuaded Mount Isa to produce copper for the war effort.  


Geoffrey Blainey has recounted an earlier major public policy event 65 years ago when Essington Lewis, the leader of BHP, visited Japan, and with his professional eye could estimate accurately the steel industry expansion taking place.  However he could not get Australian or British public policy makers to understand the significance either in terms of Japan's military expansion, or the acute need for Japan to secure supplies of raw materials from overseas.  The western world underestimated Japan's resolve, and deliberately frustrated Japan's ambitions with sanctions of critical imports. These actions certainly made it more difficult to deter Japan from aggression in south east Asia, with its key products of oil, rubber, tin and iron ore.


  Perhaps my own first policy awareness was in 1943 when my mother came home from a political meeting at which former prime minister Menzies was taunted with the name "Pig Iron Bob" because he had allowed BHP to export iron to Japan before the war. The  Australian government at the time believed we had very limited iron ore resources. Then in 1945 communist-led coal miners in Australia disrupted power supplies when post-war reconstruction was of paramount importance. To this 15 year old youngest son in a large family recovering from the sacrifices of war, it was deeply repugnant that people who had spent the war in protected industries were now on strike,.   Eventually a Labor prime minister ordered the expedient development of  open-cut mines, and even directed soldiers to work in those mines.


My own experiences of working in Mount Lyell, Kalgoorlie, Broken Hill  and in Canadian mines  taught me how very different work practices may be from place to place, and that the more productive practices are usually inherently more safe.  However I hope I am the only director of an insurance company that has ever worked in an underground asbestos mine where drawpoints were blasted at any time during the shift, and in which I had proved that we were recirculating the same air through the ventilation system for most of the Canadian winter (otherwise the skips and cages would have frozen to the shaft runners).  I asked could we not mine the whole deposit open-cut, instead of from a series of small underground and surface mines!  Had there been freehold mining titles, someone would have rationalised that asbestos field long before.


Back in Broken Hill we were locked into the most inefficient and dangerous mining method, flat-back cut and fill, which further weakened the heavy orebodies and walls, instead of taking advantage of those weaknesses by deliberate caving of the ore.  But any methods that were put forward to save costs and improve profits failed to win support because after royalty payments to the New South Wales government the financial result was much the same.  So why take the industrial relations risks inherent in a change of mining practice?  Later, while with Rio Tinto in London, I watched the incremental royalties payable by New Broken Hill Consolidated reach 98% of pre tax profits, before the government relented and agreed to a 50% ceiling.


Those superb ore bodies, which had for sixty years provided the seed capital for so much of Australia's industrial development, were being consumed simply to pay for a needlessly-large Broken Hill workforce.


I was moved to Sydney to help improve ship-loading of coal on the South Coast.  There was to be a government grant and loans.  At my first meeting I suggested a much cheaper design I had seen at Weipa, to be told that if the project cost was less, there would be less government money available. Then I was sent to London, where one of my jobs was to liaise with our oil and gas partners, in the earliest days of the North Sea exploration. Despite the progress made by the Dutch, Britain was very slow to start, and yet the British economy was going downhill fast, with massive closures of uncompetitive industries. 


A dynamic Conservative cabinet minister drove the North Sea programme to commence in 1964, just before a change of government.  Years later, when he was my London chairman, he told me that he did not believe that the incoming Labour government, left to itself, would have proceeded with the program.  Britain was thus so narrowly saved from the bankruptcy that the 1970s oil price increases would have caused.


After attending the Harvard Business School I was anxious to return to Australia, where so many great mineral projects were being built.  Instead I was sent to Iran to build a small mine and to oversee exploration for porphyry copper deposits.  A momentous public policy event was in progress right there.


The Labour government in Britain was determined to pull out all its military forces from "East of Suez" - ostensibly as an economy measure.  The Shah of Iran spent each Friday morning riding horses with the British ambassador, who would from time to time take senior British  residents (including me) into his confidence on some matters.  The Shah's message went as follows. "Please don't withdraw from the Middle East, which contains 80% of the world's oil, for the sake of saving the cost of a few military bases.  You will destablize the precarious balance between  America and Russia, and the Middle East countries will feel compelled to arm themselves massively to restore the balance that you, the British, have given so easily and effectively."


The Shah's warnings all came true.  OPEC became agressive, Middle East arms purchases became enormous, the 1970's oil shocks triggered two decades of unprecedented world inflation, there was the Iranian revolution, the Iran-Iraq war, and the two Gulf wars.  That was real public policy for minerals and energy on a global scale.  I read now with great interest the accounts being released of Russia's influence on that Labour government, and I wonder in relation to both the North Sea and the Middle East.                                                                                                                                                                                                                                   In the meantime we seem to overlook the simple fact that as we concentrate our efforts on exploiting oil and gas resources elsewhere in the world, it stands to reason that the world's largest resources, in the Middle East, must inevitably become more and more crucial to all our futures. 


Fortunately a former colleague who had moved to Gold Fields in Sydney gave me the opportunity to return to a consistent mining career in Australia.  My first task was to acquire extensive freehold coal in the Hunter Valley. We would earn coal royalties from a new open cut supplying the Electricity Commission, and own the deeper coking coal for future development.  The government kept increasing the royalty rate, in which we shared, until Premier Wran himself took the mining portfolio briefly in order to put through legislation to take away freehold coal rights, without compensation.  It was an important experience of public policy, and of freehold minerals.


On the lighter side, Federal Resources Minister Rex Connor, despite his "resources diplomacy" and foreign ownership concern, told my colleague at Bellambi Coal, who employed Rex's son and grandson, not to worry that the Gold Fields Group was British-controlled because "we are all British, after all." 


During those Whitlam years we had the Fitzgerald Report that was used to justify withdrawal of  many of the taxation principles affecting the mineral industry.  The industry was taken by surprise. We had never had to deal with such a fait accompli, with the media primed to attack us on the eve of a Federal election.  The industry accepted too readily the government view that we were unduly favoured, and did not argue for some of the key principles.  A year later, at an industry meeting in Canberra, Mr Fitzgerald appeared to be unable to understand  the questions two of us put publicly about those principles.


The speculative excesses of the nickel boom of the early 70's, which freehold mineral ownership would have largely averted, were exploited by the Whitlam government in order to publicly disparage the whole industry.  World mineral prices slumped in1975, and the industry as a whole has not paid its way ever since.


One of the early casualties was the Mount Lyell copper mine in Tasmania.  Our head office in London  had pronounced it to be dead.  I was asked to be chairman of the public company, but was told to close down the mine.  As I had not been involved in the prolonged studies into its future, I asked for three days to come up with a rescue plan. The State Labor government and the Federal Coalition government rivalled each other to help, because Tasmania had usually elected all Labor members or all Coalition members to Federal parliament. We were even asked what exchange rate we needed to survive.


Years later I was told that the unions had vowed at the time never to let me get away with it again!  I thought I had saved 700 direct jobs, and more elsewhere.  Our success at Mount Lyell led to my moving to Peko-Wallsend, which had many similar problems. At about that time, as a member of the Council of the Australian National University, I met the man running the trade union school in Albury-Wodonga.  I asked him how his students reconciled the 130,000 job losses that year in the manufacturing industry with the ongoing wage demands.  He replied that they had a public position and a private position - just as I had.  I don't think he believed me when I said I couldn't work that way.


When I became involved in national industrial relations policy I was astounded to discover that so many senior businessmen seemed unconcerned about the damage being done to Australia's economy by rampant wage cost inflation.  They even told the Fraser government to keep out of industrial relations reform - they could handle the unions.


The declining fortunes of many mines with which we were associated in the 1970's and early 1980's gave my colleagues and me considerable experience of how to keep going despite rising costs, falling prices, inflexible exchange rates and destructive unions.  However nothing could have prepared us for the political onslaught when we set about making Robe River, in Western Australia, into the most competitive large iron ore mine in the world.  The Labor Party held office everywhere except in Queensland, the Northern Territory and Tasmania, and the prime minister had grown up in Western Australia and been president of the ACTU.                                                                                    

We were surprised to find that many senior businessmen, and Liberal Party politicians, so readily believed that we were doing something wrong.  In the end Robe River became a turning point in Australian industrial history.  All that our opponents could achieve was to get Peko-Wallsend taken over by North Broken Hill.


It all helped me to understand even more clearly why our mineral industry had not stood up for itself effectively against destructive governments, let alone unions.


Energy Policy


The energy minerals, coal, uranium, oil and gas, have occupied large parts of my career.  After the two oil shocks in the 1970's no university economics department and no socialist politician was without a computer model solution to the world's future energy supplies.  The green movement developed, and ordained that natural gas should not be burnt to generate electric power.  It should be used only as a chemical feedstock.  Since then coal is too dirty, hydroelectric upsets the ecology, uranium is unmentionable, oil is too valuable, but fortunately improved exploration methods have  greatly increased supplies of natural gas.                               

However there is no worthwhile public debate about how we should meet the world's increasing demand for transport fuels and electric power.  It is implied that natural gas will see us through to energy from the sun, the wind and the tide, and possibly som e new technologies.  Conservation gets a mention, but almost never where life-style is involved, such as night sport, spectacular entertainments, and of course tourism.                                                               


We expect transport fuels and electric power to be available on demand, increasingly, but their sources are anathema;  the mines, smelters,oil rigs and refineries.  Australia is lucky that it is a net exporter of oil and gas.We are lucky to occupy such a large part of the earth's readily accessible land and continental shelf in relation to our population.


The opposition to nuclear power has for the present cut off further similar technological research and developments which might have led to other more acceptable means of power generation.  We can't know what might have been, we can only look at the extraordinary paths of  developments in other fields, and wonder what might have been.  After all even Chernobyl, deeply regrettable as it was, triggered the end of the Cold War by forcing glasnost - openness.


When the 1970's energy hysteria was at its height, the Continental Oil Company produced a paper showing that there was no near-term crisis that modest real price rises could not resolve.  It was ridiculed by the politically correct, but has subsequently proved to be true.  Unfortunately the debate collapsed in the face of near-term adequacy, and we now appear to rely on the market-place despite increasing nationalism. The world has done well to cope with a three-fold change in the price of its most essential energy commodity, oil, in the past year.


One conclusion is clear.  Of the areas of the earth's surface which are prospective for oil and gas, those occupied by the densest populations and with the highest levels of exploration and exploitation will gradually become more and more dependent on supplies from the less populated and less well explored areas, which happen to contain some of the most prospective areas - particularly in the Middle East.  The political and religious implications are immense.


Mineral Policy


Some of you may have seen Mr Rob McDonald's paper to the Institute 2000 conference in April, " The Economic Performance of an "Old" Industry."  It does not include the oil and gas part of the energy business.  He concludes that "the industry ---- over the past 25 years has failed to produce a long-term return that meets its cost of capital."   This industry  continues to provide about half of Australia's exports, and Australia has a chronic current account deficit. In that 25 year period the Australian dollar has halved in its U.S. dollar value.  The other historically-large commodity exporting industry, agriculture, is in even worse shape.  This ought to be a matter of considerable concern to all Australians.  When a Labor prime minister once called some of us     " economic troglodytes" I told a group of journalists that if we weren't prepared to work in holes in the ground they wouldn't have the foreign exchange for their overseas trips!


What am I proposing?  That without trying to pick individual companies as winners, governments have to give much more thought to the circumstances of the mineral resources industry.  The glib phrases "post-industrial", "new economy" etc. may describe a trend away from "traditional industries", but for Australia they also cloak an increasing economic dependency  measured, as I said earlier, by current account deficit, foreign debt, exchange rate slide, sale of assets to foreigners, and increasing loss of sovereignty in so many ways.  I started writing publicly about this concern 24 years ago.                 


In the mineral industry we know that technologically we can be up with the best. We can manage industrial relations reasonably well if we simply play off the front foot.  The environmental issues can be frustrating, largely because the goal posts keep moving.  My

concern is with where the industry sits within the government legal regulatory and fiscal structures.


In other words, where does government policy interact with the unusual nature of our extractive industry.  That interaction starts with land tenure.


Land Tenure  


In a free market economy we will never know how much this industry can do for Australia until we have freehold minerals -- until the market can meaningfully value land for its mineral potential as well as for its more evident surface use.  The 18th Century industrial revolution in the world came about in the two countries that had freehold mineral tenure and more personal freedom than others - the United Kingdom and its American colonies that became the U.S.A.  The rest of the world was then able to copy to some degree.                     The industrial revolution created the basis for transforming human life and health.  I have written at length on mineral freehold over the years, the reactions from within the industry ranging from  hostility to grudging agreement qualified once by the strange remark that it is too late.  Nothing is too late if people can be persuaded to it.  Many of the various native title arrangements are vague variants of defacto freehold minerals, but they are neither government regulation nor freehold.


Our present leasing system simply frustrates and distorts the normal working of the market place, and is quite unrelated to potential and actual values.  Some day a wise government will be desperate to adopt it.  The fact that most senior industry people  have not been interested, says a lot about the industry's  present problems.  A few copies of a recent paper are available after this meeting.


Fiscal Structure


Coming out of the critical needs of World War II, the industry had some unusual fiscal arrangements, which really amounted to great freedom to depreciate and amortise assets, including what was in effect a depletion allowance which originated from the American practice in places where there are freehold minerals.  Naturally the net effect of these provisions was to reduce or delay the payment of tax.  The 1974 Fitzgerald Report was all about getting rid of most of those provisions on the purported grounds that they were unwarranted concessions .  The real reason was to grab more tax.                                         


The point is that those provisions had provided great incentives to the  pioneering of massive projects in the 1960's and 70's of the like and nature never before seen in Australia, largely to supply the burgeoning but still precarious markets of Asia.  Some of us remember the risks that were taken.  Unfortunately the exaggerated nickel boom in the early 1970's gave  political ammunition to shoot at us, and we largely went by default.                  .


Since then the false analogy of a level playing-field has obscured any sensible policy debate.  Too many people became involved in the industry who regarded it as no different from any other - because they didn't know, and evidently didn't care.  Most of us here know that Mount Isa didn't pay a dividend for some 25 years, and Oil Search for 61 years.  The exploration and extractive industries are indeed different, and governments ignore those differences at the peril of Australia's economic sovereignty. We are not looking for handouts.  We are looking for sensible fiscal recognition of  the nature of our capital expenditures and of the cyclical swings of mineral commodity prices.


To create the mineral boom of the 1960's and 70's we had some world-class discoveries, an encouraging fiscal regime, the Asian industrial revolution, and a thoroughly professional industry, but not the discipline that would have been engendered by freehold mineral tenure.


To revive the industry we need the fiscal regime, freehold minerals, and a reassertion of professionalism.  Most of all we need to attract more able young people.   Mr. Donald Morley, this year's President of  The Institute, took an important step in this direction when he initiated the Education Endowment Fund twelve years ago.  The second Director of the Fund, Dr. Stewart Gillies, provided important initiatives and a profound understanding of the tertiary education system.                                                                                                               


The strongest part of our mineral education system has long been here at the University of Queensland.  Mount Morgan and Mount Isa, led by Malcolm Newman and Julius Kruttschnitt, worked with Ian Morley, the State Chief Mining Engineer (and  father of Do n Morley) to start this Department in 1949.  David Sault and I were able to stay here to complete our mining courses.


How does an industry reestablish its role, and persuade governments to recognize the essential nature of certain systems such as freehold minerals and freedom of depreciation and amortization?  I question very strongly the reliance put on industry associations over the years.   There has to be a champion, with real support from  his employer. It is not easy.  After the Wik decision of the High Court, Hugh Morgan was reviled in the media for daring to predict precisely what would come of it - nothing but frustration, delay and expense.  I do not believe the Australasian Institute of Mining and Metallurgy should be expected to play a leading external role.  By all means it should conduct internal debates, but the external roles must be taken by leading individuals of real authority.


  We don't have to go back to the records of those great men of the past, like Julius Kruttschnitt, to find out how and why.  We simply have to face today's facts and deal with them.  It is never too late to bring about radical changes.  Australia's geographic isolation is both a great challenge and a deceptive shield.  We keep sliding behind that comfortable, often conceited, and ultimately disastrous shield, and have to be jolted out of it.


Thank you.                      Charles Copeman        4th August 2000